But Skilling was a wreck. His divorce was just going through; he had hoped to set up a home a few blocks from Sue, so that the kids could come over whenever they wanted. But it wouldn’t work. There was a visitation agreement, and Sue insisted he stick to the terms of the deal.
“If I had known the wedge this would drive between me and my kids …,” he said, the words trailing off.
“Jeff,” Mark murmured, “you’ve just got to be sure to be there for them when they need you. It’s never too late to fix things”
Skilling pinched the bridge of his nose as he closed his eyes. “I’ve just fucked everything up,” he said. “How did it get like this? How did I get here?”
Mark looked at Skilling, feeling strong twinges of pity. How could he possibly be handling the demands of his life while falling apart?
Skilling exhaled slowly as his eyes glanced over another interminable report from retail. He was seated in a tiny conference room deep in the bowels of the Enron building, listening as Ray Bowen and his staff detailed problems facing the division. Problems, always problems.
It was mid-1996. Bowen had come to Skilling weeks before, saying he wanted to treat retail like a laboratory project, conducting internal reviews to figure out the business. Skilling approved the idea enthusiastically, but now the result was this. Problems.
As members of the retail staff listened, Bowen droned on, laying out a more developed version of Gustav Beerel’s original calculations that showed the challenges of providing electricity to residential customers. Profit margins were razor thin, massive capital investments were required. Bowen was describing the cost of acquiring a customer when Skilling held up a hand.
“You’re making me really nervous, guys” he said. “The fact that you’re focused on the numbers, and not the underlying essence of the business, worries me. Working from the numbers is backward. I don’t want to hear that.”
“Well, Jeff, the numbers have to make sense,” Bowen said. “And there are challenges here. We’ve got to be honest and ask ourselves realistically whether we can scale this to the point where we can actually make a profit”
Skilling bristled. “Then you guys must not be smart enough to come up with the good ideas, because we’re going to make money in this business.”
“I’m not drawing any final conclusions. These are just observations about things we have to consider.”
“Well,” Skilling replied, “you’re making me very nervous with the way you’re thinking about this business.”
A heavy silence followed. “I’m just telling you what I think,” Bowen said. “But we’ll go through it again.”
The meeting wrapped up, and Bowen led his team out the door. He was flabbergasted. Sure, ideas were important, but they had to be built around numbers. A business wasn’t going to succeed just because Jeff Skilling thought it should. Bowen punched the button for the elevator. This place I work for is a crazy company, he thought.
———
Near the lobby of the Phoenician hotel in Scottsdale, Ken Rice glanced up at Camelback Mountain as he walked past a sparkling swimming pool tiled with mother-of-pearl. He headed inside and soon was passing through a palatial hallway toward a conference room reserved for Enron’s talks on the possible Portland General merger.
It was July 16, 1996, a day when teams from both companies had traveled to the Phoenician for what everyone hoped would be the final negotiations. Most of the deal had been hammered out, and Enron had put an offer on the table that Rice considered pretty rich: a 25 percent premium over the trading price of Portland General’s stock.
But Joe Hirko, Portland General’s CFO, argued the company needed more. Rice and Baxter wouldn’t budge. Hirko went off and phoned Ken Harrison, the company chairman who was golfing in Scotland. He returned after one in the morning; Baxter, Rice, and their team were playing hearts.
“Guys,” Hirko said, “you have to get us more money.”
Rice held up his hands. “All right, tell you what. We’ll call Rich Kinder. I’m sure he’s asleep, but we’ll call him and wake him up. He’ll decide.”
“Great,” Hirko replied. “Let me know.”
Hirko headed out of the room. Rice glanced at Baxter.
“Hey,” Baxter said. “I’m not waking up Kinder.”
“I’m not gonna call him either,” Rice said. “We don’t need to. We’re not going to raise the price.”
He picked up his cards. “Let’s keep playing.”
Feet went up on the conference table. Baxter checked his watch. “How long do you think we should wait?”
“Aw, let’s give it forty-five minutes,” Rice replied. “Let’s make them think we’re really pushing Kinder hard.”
Minutes later, in the middle of a hand, the conference room door swung open. Hirko rushed in and saw everyone looking relaxed.
“What are you guys doing?” he asked.
Rice didn’t miss a beat. “We called Kinder, but couldn’t get him. We’re waiting for him to call back.”
Hirko eyed everyone suspiciously. “Oh. Okay.”
He left the room, and soon Rice and Baxter came out with the bad news—there would be no more money. Kinder, they lied, had said no. The negotiations collapsed.
The next day, Ken Harrison called Kinder at the office, asking to get the talks back on track. Within days a deal was struck. Kinder caved, giving Portland General the huge premium it sought. The merger, worth more than three billion dollars, was approved by both boards.
In late July, Ken Lay flew to Portland to welcome a thousand new employees to the Enron family. He looked buoyant as he promised that they were part of a grand mission that would shake the industry to its core.
“We have started something today that everyone in the electricity industry, and everyone in the gas industry, is going to remember for a long time,” he told the crowds.
Lay was right, but not for the reasons he imagined. With the merger announcement, events had been set in motion that, in time, would lead to Enron’s first major crime.
CHAPTER 5
THE FALCON 900 DESCENDED through the clouds over New Jersey, gently touching down on runway 13-31 at the Morristown Municipal Airport. The jet taxied toward an array of small buildings, coming to a stop beside a corporate hangar. As the screaming of the turbofans died out, a pilot popped the door and unfolded the stair steps. Lay appeared, walking down to the tarmac.
His trip this Sunday evening, September 15, 1996, was a closely guarded secret. As far as anyone at Enron knew, he was in Indianapolis, attending a board meeting at Eli Lilly and Company. Not even his children were aware that he had instead spirited himself away to New Jersey for a covert meeting about taking the top job at AT&T, the telecommunications giant.
The opportunity had come up a week or so earlier, when an executive recruiter told Lay that AT&T was looking for a new leader and was interested in candidates outside the industry. His wife, Linda, had encouraged him to pursue the idea, and so here he was, on a clandestine trip to meet Bob Allen, AT&T’s current chairman and chief executive.
The timing seemed perfect. He was in his eleventh year at Enron’s helm and had been thinking of moving on. Two years before, Rich Kinder had been anticipating taking over, but Enron’s directors had balked. Kinder was recognized as a great operator, a man who could squeeze the last dime of expense out of any business. But some directors worried he wouldn’t be able to take Enron to the next level.
The rejection had infuriated Kinder, but he had agreed to continue in his job for two more years if his contract was changed. Under the new terms, if he wasn’t selected for the top job by early 1997, he could walk away from Enron with millions of dollars. The deadline was just months away; if Kinder was going to take over, Lay thought, jumping to AT&T would be a brilliant career move.
Lay walked into the hangar. Just inside, he saw a large man with dark slicked-down hair. “Ken?” the man said. “Hal Burlingame, head of human resources for AT&T.”
They shook hands. Burlingame asked about the flight, then escorted Lay upstairs, where Allen was waiting. For an hour and a half, they talked about AT&T—its challenges, its possibilities—with Lay describing his own week-old vision for the company. Then Allen took him by surprise.
“What I’ve been thinking,” Allen said, “is that we would have a transition period, a time where I would stay as chairman while everyone settled in. Two years or so.”
Lay shifted in his seat uncomfortably. Two years?
“Well, Bob, that could be a problem,” he said. “What would be your role versus my role if I took the job?”
Allen held up his hands. “There’s nothing to worry about, Ken. You would have complete latitude to do whatever you needed to change the company.”
Not enough, Lay thought. “If you’re still there full-time, walking the halls every day, that could be a problem. It sets up a situation where there would be divided loyalties between the previous CEO and the current CEO.”
“Ken, really, this is not something to worry about.”
A short while later, Allen thanked Lay for coming. Lay headed back down and found his pilots, Kage Reese and Darvin Mitchell, and the three climbed onto the plane. Within minutes, they were winging their way back to Indiana.
Lay settled into one of the leather seats on the right, gazing out at the evening lights below as he pondered Allen’s words. His desire to stick around left Lay uncomfortable, but still, this could be a dream job.
There was no question about it. Lay needed to inform his directors about what was happening; after all, in a few weeks Rich Kinder might need to take over the helm at Enron.
Shortly after six the next evening, Lay pulled into the garage of his house on Looscan Lane. At that point, he and Linda were in transition; they had recently sold their larger home and were living here until renovations were completed on their apartment at the Huntingdon.
Lay headed inside and greeted Linda with a kiss. After filling her in on the Allen meeting, he went to a small office to phone John Duncan, head of the board’s executive committee. “Hi, Johnner,” Lay said.
“Ken, how are you?”
Small talk. Then Lay shifted gears.
“John, I’ve got an interesting thing that happened to me,” he began, “and I need to share it with you.”
The story spilled out. The call from the headhunter. The invitation to New Jersey. The meeting with Bob Allen.
“I’m certainly still interested in this,” Lay said. “And it just highlights that the board’s got a decision to make on Rich Kinder before year-end.”
“Yes,” Duncan drawled.
“Well, assuming Rich is going to become CEO, the timing here has turned out to be pretty fortuitous.”
Lay took a breath. “So in the next few days I’m probably going to have to let them know if I’m willing to continue considering this. And I didn’t want to get to that point and surprise all of you”
A moment’s hesitation. Duncan was having trouble digesting the news. The board wasn’t ready for this.
“Ken,” he finally said, “I can see where this opportunity would be certainly something to consider. But you made Enron. You’re the person most closely identified with everything it has accomplished”
Duncan laid it on thick. The board loved Lay. Loved his strategies. Loved his demeanor. Just loved everything about him. “Now,” he said, “even if we make a change, we had hoped you would continue with the company in some capacity, chairman emeritus or something like that.”
Lay replied that he was grateful, but said the AT&T job might be an opportunity he couldn’t pass up. The two agreed to speak again soon and got off the phone. Within seconds, Duncan was back on the line, spreading the news to his fellow directors. At the same time, Lay sat in his office, thinking about Duncan’s words.
For months he had assumed Kinder would take over. But there was such reticence in Duncan’s voice. Perhaps the board wanted him in its back pocket in case Kinder didn’t work out. Perhaps. But there was another possibility. Could the directors be planning to pass over Kinder again?
In the days that followed, a flurry of secret calls and meetings took place between Lay and the directors.
Led by Duncan, the board repeatedly pushed the same message—stay. Enron needed his counsel even if Kinder took over, they said. That couldn’t happen, Lay replied. There should be just one chief. Once someone else took over, he needed to leave.
The conversations evolved into a debate about Kinder. Some directors thought he was more than ready for the job; others weren’t so sure. Yes, Kinder was a hell of an operations guy. But was that what Enron needed? Somebody who could keep the trains running on time? What about somebody with the vision to plan new routes instead?
Kinder, some directors argued, was not the type who would come up with the Next Big Idea, the lofty strategy that would keep Enron chugging ahead with growth of 15 to 20 percent a year. Lay, whose word could have swayed them, was tepid in defending his heir apparent.
Maybe it was the pressure from the board. Maybe it was the meeting with Allen. But as the days passed, Lay’s infatuation with AT&T cooled. Then suddenly, on a weekend in late September, as he sat in his living room with Linda, he made his decision.
“Linda,” he said, “this just doesn’t feel right”
Lay telephoned Duncan that very day. He was pulling out of the AT&T search, he said, and wouldn’t make any personal plans until after year-end. “Thanks, Ken,” Duncan sighed.
The small crowd gathered at the San Diego offices of Science Applications International Corporation, eager to witness a little history. It was September 23, 1996. Right on schedule, Pete Wilson, California’s governor, emerged and took a seat at a table stacked with papers.
After years of debate and fighting, Wilson was about to sign Assembly Bill 1890, the opening salvo for deregulation of California’s electricity markets. New players would be allowed into a power system that for years had been dominated by a small group of utilities.
This was a moment to remember, Wilson told the crowd.
“We’re doing more than signing a new law; we are shifting the balance of power in California,” he said. “We’ve pulled the plug on another outdated monopoly and replaced it with the promise of a new era of competition.”
With that, Wilson picked up the pen and signed his name. California’s brand of deregulation had become law; a new market would have to be ready to go within two years.
“How the fuck did we let this happen?”
Lou Pai was raging about the California law to his fellow Enron executives. This wasn’t deregulation, he shouted, this was Rube Goldberg, some sort of freak hybrid—a bit of deregulation, a dash of regulation, with a dollop of centralized government on the side.
Skilling, Causey, and others in the room weren’t about to argue. Enron had been pushing for a system where any company with power—from its own plants or from trading—could gain access to the transmission lines and compete for customers. Whoever came in with the best prices would win the day. But California had created a mishmash of rules based on market theories that only a politician could love.
The California utilities had, until then, purchased power through long-term contracts. Now they were required to sell their own generation plants and buy power every day, in the spot market, where prices fluctuated. But the price most consumers paid was cut ten percent from their regulated price, then locked in place for five years. In other words, no matter how much it cost for the utilities to supply the power, the price to consumers wouldn’t change. The approach was based on the idea that changing the rules would cause spot prices to drop dramatically. No escape hatch was written into the law in case the theory proved wrong.
The rules also created a new marketplace—one controlled by two quasi-governmental bodies—to set the wholesale prices for electricity and manage the state’s transmission lines. This wasn’t a setup where the best competitor won, Pai argued. It was all about the
rules, figuring out how to best play the system.
Causey nodded his agreement. “These rules are really a disaster,” he said.
Pai shot a look at Steve Kean, a government-relations specialist who had lobbied for Enron out in California. “Why didn’t we get this damn thing changed?” he shouted.
Kean, a calm, professional sort in his thirties, set his hands on the table. “Lou, we did the best we could. This is a political process. We certainly can’t dictate outcomes. All we can do is nudge it one way or the other.”
Sure, Kean said, Enron contributed to California politicians, but so did the utilities, which fought deregulation tooth and nail. And they had the best advantage—large numbers of California employees, voters, living in every district. Campaign cash might buy Enron a seat at the table, but it wouldn’t give the company the right to order the meal.
“Well,” Causey said, “it’s just going to be very hard to make our business work in California.”
“Listen,” Kean said. “I know it’s certainly not optimal, but there should be some way we can get at it.”
That grabbed the room’s attention.
“The one thing you can count on is that if the government set up the market, there will be subsidies someplace,” he said. “And if you can find the subsidies, and offer the people who aren’t getting subsidized a better deal, you’d own that part of the market.”
Nodding, Skilling jumped in. “That’s right,” he said. “If the government sets up the market, it’s going to be done wrong. The only way it’ll be right is by accident.”
He looked down at the row of faces. “Just know the rules better than anybody else. Then you’ll make money.”
By October 1996, the merger agreement with Portland General was still generating plenty of work at Enron. The deal itself wasn’t the issue; rather, its ramifications were keeping everyone busy. If Enron was really going to buy an electric utility, then federal rules made it essential for the company to sell other assets.
The first on the block were two co-generation plants—Texas City and Clear Lake—that were jointly owned by Enron and Dominion Resources, another energy company. Because such plants convert waste heat into power, they were designated as “qualifying facilities,” requiring utilities not only to purchase their power but to pay higher rates. Problem was, plants owned by a utility didn’t get the price boost. So buying Portland General meant the premium pricing for the co-generation plants would soon disappear, making them less valuable for Enron to own than to sell.
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